Opening Bell: Worth Less, Costs More

Mortgage rates jumped to their highest level in nearly five years, as investors continue to worry about the health of Fannie Mae and Freddie Mac, The New York Timesreports on A1 and The Wall Street Journal on C14.

It’s another serious blow to the reeling housing market, making it more expensive to buy houses that are already declining in value. It will also worsen foreclosures by raising the payments of all those adjustable-rate mortgages that reset according to going rates.

Fannie and Freddie are propping up the entire housing market right now by buying most of the mortgage loans being created. Since the bubble popped they’ve essentially become buyers of last resort as others shy away from purchasing home loans. Now, investors are worried that the government-sponsored entities will have to dial back their purchases to preserve capital, making it more expensive to borrow.

But the Times seems to overemphasize the Fannie and Freddie angle, burying information that rising inflation is contributing to the rise in borrowing costs, too. It notes that jumbo rates reached their highest level in eight years, something that hurts its thesis since these loans are too big for Fannie and Freddie to buy.

Thirty-year mortgage rates climbed to 6.71 percent yesterday from 6.44 percent at the end of last week. The paper says that would add $852 to a year of house payments on a $400,000 home, noting the rise in rates, which mirrors one earlier this year, will further pressure the government to shore up Fannie and Freddie and the housing market in general.

Rewarding failure

The banking industry has officially entered Bizarro world. Yesterday five big banks reported miserable second quarters with a combined $11 billion in losses—and their shares jumped an average 14 percent, the Journalsays on C1.

Both papers are somewhat incredulous about investors’ reactions to the news, with the Timessaying on C1 that “Bank Investors Redefine Bad News.” Wachovia posted a massive $8.9 billion loss, eviscerated its dividend by 87 percent, reported bad signs on its loans, and its stock skyrocketed 27 percent—in part because it said it would fire 6,400 workers. WaMu lost $3.3 billion and reported a record number of mortgage delinquencies and its shares rose 6 percent. The Journal says the five reserved $13 billion for future losses a “sign of the losses likely to haunt them for years.” The Times:

Many investors seem to see signs of hope in red ink that once would have shocked them.

But it has now been a year since the credit crisis erupted, and, so far, the optimists have been proven wrong time and again. Skeptics say it could take years for banks to recover from the worst financial crisis since the Depression. And even when things do improve, the pessimists maintain, banks’ profits will be a fraction of what they were before.

Financial stocks have rallied in the last five days by 31 percent, the Journal says, without noting something that’s surely not a coincidence—the Securities and Exchange Commission’s rules on “naked” shorting coincides perfectly with the rise. The Times doesn’t mention this either. Does the rise mean the SEC was right or has it sent an unnecessary chill through the short markets?

The taxpayer bill for Fannie & Freddie

The government rescue of Fannie and Freddie could cost taxpayers $25 billion, the Financial Timesreports on page one and the NYT on C1. That’s according to the best estimate of the independent Congressional Budget Office.

But the CBO said most likely it wouldn’t cost anything, though there’s a 5 percent chance a bailout could cost $100 billion. It seems unlikely to us that taxpayers will come out of this clean:

Under generally accepted accounting principles, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies were considered to be “adequately capitalized” by the Office of Federal Housing Enterprise Oversight, which regulates them.

But on a fair value basis—or what the companies’ assets would fetch on the market today—the value of the mortgage companies’ assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering that their total debt is $1.6 trillion. That explains why there have been numerous calls for the companies to raise additional capital.

W’s Compassionate Conservatism in action

The richest 1 percent of Americans took the highest proportion of income in more than two decades—maybe since 1929—but their tax rate fell to the lowest level in eighteen years, according to new IRS numbers for 2006, the Journalsays on A3.

According to the figures, the richest 1% reported 22% of the nation’s total adjusted gross income in 2006. That is up from 21.2% a year earlier, and is the highest in the 19 years that the IRS has kept strictly comparable figures. The 1988 level was 15.2%. Earlier IRS data show the last year the share of income belonging to the top 1% was at such a high level as it was in 2006 was in 1929, but changes in measuring income make a precise comparison difficult.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

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